A decrease in aggregate supply means
A) both the real domestic output and the price level will decrease.
B) the real domestic output will increase and rises in the price level will become smaller.
C) the real domestic output will decrease and the price level will rise.
D) both the real domestic output and rises in the price level will become greater.

Question

Quizplus · Accepted Answer

When there is a decrease in aggregate supply, it means there is a decrease in the availability of goods and services in the economy. This leads to a decrease in real domestic output as the economy is producing fewer goods and services than before. At the same time, due to the decrease in supply and the same level of demand, the prices of goods and services will rise, leading to an increase in the price level. Therefore, the correct choice is C, which states that the real domestic output will decrease, and the price level will rise.

A Decrease in Aggregate Supply Means